Advanced Micro Devices, Inc. (NASDAQ:AMD) is starting off 2018 right. AMD stock has soared from $10 and change to $12 in just two trading days. All of this was amplified by the discovery of a massive security flaw in chips from competitor Intel Corporation (NASDAQ:INTC).
Many believe this newly discovered security problem at Intel underscores how much more secure AMD chips are, and it will provide a sales tailwind to AMD. Consequently, AMD stock is trading at its highest level since early November 2017.
However, I’m not convinced that this rally will continue.
Bulls tend to get over-excited about AMD stock. Over the past year, AMD has made similar huge runs such as the one it has made to start to 2018, but such huge runs have usually marked a near-term top in the stock.
This is also a stock that has tread water in overvalued territory for the past 12 months. I said at the end of November that “AMD stock doesn’t look like a value buy until it dips below $10.” The stock proceeded to dip below $10 in early December. That was a good time to buy. But here at $12, it is back into overvalued territory.
Because of that combination, I think AMD stock is best avoided on the heels of a massive two-day move. It looks especially vulnerable to a pullback rather soon.
Bulls Always Get Too Excited About AMD Stock
In following AMD, I’ve noticed that this is an excitable stock with an excitable follower base. That is why the stock is subject to huge pops, and equally big drops.
For example, look at StockTwits data. For those who don’t know, StockTwits is essentially the Twitter Inc (NYSE:TWTR) for stocks. Most importantly, the platform leverages crowd-sourced opinions to develop sentiment ratings on every stock.
StockTwits recently released its “This Year on StockTwits” post wherein the company analyzed which stocks people were most bullish on in 2017, which ones they were most bearish on, which ones they were most right on, and which ones they were most wrong on.
The stock that the StockTwits community was most wrong on in 2017? AMD stock. Throughout 2017, bulls were in control of AMD’s StockTwits message board. The sentiment was consistently bullish. But AMD stock fell 5% last year.
In other words, outspoken bulls were just simply too excited all year long about AMD’s growth prospects.
From this standpoint, I think this recent rally is just another huge pop in an excitable stock that will eventually result in an equally big drop. Yes, Intel’s security woes do provide a window of opportunity for AMD. That window of opportunity is sizable, given the scale of Intel’s security problem.
But this isn’t a huge game changer. Some customers will shift to AMD, but a lot of customers will simply replace old Intel processors with new Intel processors. So this is a small win for AMD, but not something that will substantially change the growth narrative.
Yet, AMD stock has popped nearly 20% in two days. That is a narrative-changing move.
AMD Is Overvalued
Such a big move would only be warranted if AMD stock was significantly undervalued.
But it’s not.
This is a 40% earnings growth narrative (see my math here). Intel’s security issues may turn this into a 40-45% growth narrative. But even still, investors aren’t willing to pay 92x earnings for a 42.5% earnings growth narrative. And why should they? That multiple represents a near-120% premium to growth potential.
The S&P 500 is trading at a 90% premium to growth potential (20.4x earnings for 10.7% growth into 2019).
If you apply that same premium to AMD stock, you get a “fair” price-to-earnings multiple of nearly 81. An 81x multiple on this year’s $0.13 earnings estimate implies a fair share value of about $10.50.
Bottom Line on AMD Stock
Intel’s security problems provide an incremental benefit to Advanced Micro Devices. AMD stock should trade higher on the news.
But the 20% move to start 2018 has thrust the stock into overvalued territory. All else equal, AMD stock doesn’t look like a value buy until it dips below $10.50.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.